Norges Bank Investment Management (NBIM), one of the world's largest sovereign wealth funds currently managing over $1.2 trillion in assets, holds a stake in more than 9,000 companies in 70 countries and expects all of them to achieve net-zero greenhouse gas (GHG) emissions by 2050.
“We are focussing our work on the biggest emitters and have seen encouraging progress with these companies in terms of setting net-zero targets and defining realistic pathways to get there,” Wilhelm Mohn, global head of corporate governance for NBIM told AsianInvestor.
However, the transition cannot be achieved by companies and investors alone and meeting this ambition will depend on effective climate policies at both the global and the market level to efficiently price and restrict GHG emissions, he said.
Mohn believes that the sovereign wealth fund’s engage-to-change approach will ultimately yield the best financial results for the fund and will also contribute to improved real-world outcomes.
“While frameworks and assessments can be helpful in prioritising and informing engagements, the discussions should ideally go further than asking companies to meet binary objectives,” he said. “The best engagements are tailored to the individual company, constructive, and business-relevant.”
The lack of quality emissions data remains a hindrance as the fund seeks to make investment and ownership decisions, said Mohn, although some progress is being made.
“Over the last years, we observe a positive trend with more and better data on Scope 1 and 2 emissions becoming available. There is a longer way to go when it comes to Scope 3. Increasingly, forward-looking data such as on companies’ net zero targets is becoming available,” he said.
In ESG parlance, Scope 1 emissions refer to the greenhouse gas (GHG) emissions that a company makes directly, for example from running machinery for its operations. Scope 2 emissions are the GHG emissions it makes indirectly, as when the energy it buys for heating and cooling buildings is being produced on its behalf.
Scope 3 emissions are much trickier for companies to calculate as they include all the GHG emissions that a company is indirectly responsible for throughout its entire value chain. For example, the emissions of its suppliers, and of its products when customers use them.
“We expect companies to set net zero targets for material scope 3 emissions. Measurement, reporting and verification continues to be a challenge for both us and the companies,” said Mohn.
Targeting net-zero emissions by 2050 is in line with the Paris Agreement, and hundreds of asset owners and managers have publicly made the commitment to reach this target in recent years.
Despite combined efforts to pool information and standardise ESG data reporting to bring transparency to sustainable investing, reliable data remains the most pressing challenge for these large investors in the mission to decarbonise their portfolios.
“Not all companies are reporting Scope 1, 2, and 3 emissions necessarily and, of course, there are particular data challenges around Scope 3,” Jane Ambachtsheer, global head of sustainability at BNP Paribas Asset Management (BNPAM) told AsianInvestor.
To tackle these challenges, Ambachtsheer said her firm has dedicated a significant portion of its internal quantitative research team to studying carbon emission estimation models and verify data that it receives from third party providers as a “double-checking mechanism.”
Staying on top of the data internally is necessary, but as a member of the Task Force on Climate-Related Financial Disclosures (TCFD), which includes 31 members from G20 nations, Ambachtsheer has been advocating for the introduction of mandatory disclosures across different regions including Asia. She is positive about the progress being made on that front.
“We're also encouraging regulators to focus on interoperability of regional taxonomies that are in development so that global capital markets can have some level of consistency. It’s about doing the best with the data that we have and the data we can estimate, but also pushing on markets to continue the flow of data so that we can have verified, higher-quality data,” she said.
ESG in the Asia Pacific is perceived by some investors as less developed than in regions like Europe and North America, but according to Ambachtsheer there are a lot of positive signs of change.
“We've seen strong interest in sustainability from Asian investors, and if you look at some bodies of research from last year on fund flows there is demonstrable interest from a retail perspective,” she said.
There have also been regulatory developments in the Asian region, both in terms of mandatory disclosures in different markets from a corporate perspective, as well as forthcoming fund standards in terms of labelling requirements from a regulatory perspective, said Ambachtsheer.
“I think disclosures in Asia are not as good as other regions in terms being able to access some of the ESG information. From a climate perspective, Asia is the region that has the most challenges ahead in terms of the need to transform the economy,” she said.
From Ambachtsheer’s perspective, the region presents a huge opportunity as well as an obligation for the financial sector to both engage with companies and support them in the net-zero transition. By identifying key sectors in different countries to receive capital, investors can support different industries in a way that will help to build thriving and resilient economies. Climate mitigation and transition financing are also set to play more critical roles.
“It's clear for everyone to see that the physical consequences of climate risks are very real in Asia. We're already experiencing them and they're incredibly expensive and we need to continue to push forward together to tackle them before it's too late,” she said.